Johannesburg – Although there are signs of recovery for the South African economy, this will only be “modest” given low confidence levels, according to Reserve Bank deputy governor Daniel Mminele.
Mminele delivered an address at the Economist Corporate Network Event on Monday, in which he shared on the economic outlook and the role of the South African Reserve Bank (SARB) in pulling the economy out of its rut.
Mminele highlighted that there are factors contributing to a recovery, such as a drop in inflation over the past year which has provided “breathing space” for South African consumers. The decline in the current account deficit, to as low as 2.1% of GDP in the first half of the year, also helped “shelter” domestic financial markets from local shocks.
“This explains, in part, why the rand and domestic bonds have not shown a strong or durable reaction, this year, to adverse political or policy news,” he said. Further recovery in the manufacturing and mining sectors is expected to contribute positively to GDP growth in the third quarter.
However, confidence levels remain “highly vulnerable” to upcoming political events which could influence important government policies, he explained. “It (confidence) also remains vulnerable to the risk of further sovereign credit rating downgrades.”
Following Finance Minister Malusi Gigaba's mini budget last week, economists expressed concerns that it would not be enough to stave off a credit downgrade.
Mminele warned that a rise in the oil price could drive up inflation, impacting the terms of trade. Further, monetary policies in advanced or developed economies could also impact emerging market currencies, like the rand.
“Even in a relatively favourable scenario – where confidence gradually improves, inflation remains moderate, and the output gap gradually closes – structural factors are likely to limit the scope for a meaningful growth pickup,” he said.
These structural factors include weak productivity, skilled labour shortages, high job searching costs and high concentration in many sectors, and regulation acting as a barrier to entry for new players.
Fixing infrastructure bottlenecks, like power supply, will not do much to lift growth in the next two years, he explained.
“For these reasons, the SARB projects only a moderate acceleration in actual real GDP growth, from 0.6% this year to 1.2% in 2018 and 1.5% in 2019.”
Mminele unpacked the tools at the disposal of the SARB to help lift growth, explaining that it takes steps consistent with its mandate of price stability to support economic activity.
“An aggressive easing of monetary policy – for the sole purpose of kick-starting the economy – could yield disappointing returns for an unacceptable degree of risk,” he said.
The economic downturn was mainly due to non-monetary factors. For this reason, rate deductions may not create the needed demand.
“For example, if the main concern of many businesses is a lack of policy and regulatory clarity, it is doubtful whether lowering the cost of capital will entice them to invest.
“Equally, risk-averse households may use lower interest rates to ensure a faster repayment of their debt rather than increasing their expenditure or investing in new residential property,” he pointed out.
If demand indeed responds to interest rate cuts, supply constraints might impact the ability to meet increased demand. This will result in higher prices, a rise in imports that could widen the trade balance and ultimately depreciate the exchange rate, he explained.
Mminele added that risks to the inflation outlook also limit the SARB’s actions.
Too few tools
The best way the SARB can assist is through maintaining medium-term price stability, he said.
Mminele explained that the economic difficulties demonstrate that monetary policy on its own cannot address structural challenges to the economy.
“At the end of the day, a central bank has too few tools at its disposal to solve the large number of problems that we are currently facing – both here and abroad.”
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